Absorption of Carbon Costs Will Prolong Our Dependence on Coal

January 11, 2018

As we look towards the future and envisage a world that is entirely dependent on green energy, we need to look at how to reduce our usage of coal. Yet, while discussions generally revolve around coal mining and burning, there is little talk about the vital element that links the two: coal transportation. Transportation amounts to a significant cost of electricity and looks likely to be a cushion that will slow down the process of phasing out coal in the US energy system.

This is the conclusion that has been drawn by Louis Preonas, an Energy Institute PhD student. The paper, “Market Power in Coal Shipping and Implications for U.S. Climate Policy”, demonstrates how railroads make hefty profits from the transportation of coal. Indeed, in order to keep coal-shipping business, the railroads absorb some of the price increases carbon is facing. This is going to have a negative effect on a country trying to reduce its greenhouse gas emissions.

Preonas estimates that the charges levied on generators, associated with their greenhouse gas emission aren’t actually affecting coal profitability as much as it is assumed. As coal prices go up, transportation costs seem to be falling, which evens out overall profits.

Not all railroads are absorbing these extra costs but the impact can be clearly seen at plants that are serviced by just one railroad. This counts for almost half of all coal-fired power plants in the US. Plants that sit near rivers and lakes that have multiple railroad access routes are less able to cushion the blow of the levies and to keep their customer’s plant running.

At the moment the cost of GHG emissions is quite low or non-existent across most of the country so it is difficult to assess the impact GHG pricing will have on coal-fired generation. Nevertheless, the actions of the railroads are an indicator of how transportation companies are likely to react if the carbon price becomes a factor to contend with.

Preonas notes in his work that this practice by the railroads of lowering their prices in order to keep certain plants in business means that greenhouse gas emissions have reduced 8% less than they would have had the railroads not been cushioning the blows of the increased prices. The fracking boom was expected to have a much more significant impact on the level of GHGs being emitted.

The effects of fracking are fascinating and are worth considering but what should really be at the forefront of policymakers’ minds is the effect it will have on the effects of carbon pricing on coal plants. Preonas indicates that some coal plants could have as much as a quarter of their carbon price absorbed, which means they would be operating with 25% less extra cost than other plants.

As of yet, the world does not have much experience with using market mechanisms to regulate environmental pollution. They certainly have much less effect at the moment than legislation designed to control pollution. It will be interesting to see how these market mechanisms develop in the future and to see how effective we can make them.